The £74m total cash consideration includes assumed working capital of £7.5m. For its year to December 2006, Gamestation, as the business is branded on the high street, generated revenues of £203.5m, EBITDA of £6.5m and pretax profits of £2.1m.
The acquisition is expected to 'moderately' enhance earnings per share, before synergies, in the first full year following completion.
GAME is currently anticipating synergies of around £7m per annum by the second full year on the back of efficiency gains, better inventory management and leveraging existing overheads. Against that, the upfront cost of integration is estimated at £4m, of which £2m will be taken over its current financial year. There will also be incremental capex of £4m on IT and logistics infrastructure development.
Gamestation, part of the Blockbuster video and game rental group, operates 217 stores in the UK, mainly in secondary locations on the high street as well as shopping centres. It claims to be the fastest growing retailer of video and computer games in the UK and certainly its progress since Blockbuster purchased the business in October 2002 has been impressive. In just four years under Blockbuster ownership the chain has grown from 64 to the current 217.
GAME Group plans to maintain the standalone Gamestation fascia but will close down Gamestation concessions within Blockbuster stores.
The price being paid for Gamestation looks fair while the rationale for the purchase appears sound. Gamestation is particularly strong in serving the core gamer and indeed its business model was developed 'by gamers for gamers' compared to the more mainstream model of GAME.
Furthermore, the experience at a Gamestation store is more pre-owned focussed than GAME, and predominantly tailored to appeal to the male games enthusiast. On the face of it, it looks like a rather good fit.
GAMES Group chairman Peter Lewis says the Gamestation business has been long admired by his company and is 'complementary to GAMES' existing business in terms of both store portfolio and target customer'. He adds: 'By investing in both brands we will further enhance the group's retail strategy while continuing to deliver and broaden our consumer reach.'
Steve Davies, analyst at Numis, responded positively to the purchase. The timing is pretty good: As with GAME, Davies expects strong profit growth for Gamestation this year given the strength of the console cycle. That will have the impact of bringing down the acquisition multiples on current year Gamestation earnings.
As ever with acquisitions, there are integration risks but on the on the flip side, Davies suspects GAME is being conservative with its guidance on synergies.
Another major positive from the deal is that the purchase prevents US competitor Gamestop from buying Gamestation, which was always a potential threat for GAME Group.
On the whole, Davies regards the acquisition as 'a sensible move'.
Early morning, GAME Group (The) PLC shares were up 6% or 9p to 163p, giving a forward 2008 PER of 18, falling to 15.5 in 2009. The prospective yield is 2%.
Numis rates the shares a buy with a price target of 184p.
